Paying the Tax Piper. Take Advantage of Opportunities

January 01, 2010

Robert J. McGarvey

TAX MINIMIZATION IDEAS FOR HIGH NET WORTH INDIVIDUALS FROM EISNER LLP

What you do not know about taxes will cost you — and there is no “might” or “possibly” about it, say the tax experts at Eisner LLP, a Manhattan-headquartered accounting firm with offices in New Jersey and Long Island. One big fallacy: that 2007 tax liabilities are already written in stone. “There still are steps you can take to reduce the tax burden,” says Tim Speiss, practice leader, Personal Wealth Advisors at Eisner.

Probably the bigger savings will come off the 2008 tax bill, admits Christopher Loiacono, co-chair of Eisner’s Tax Advisory Services group. But all hope is not lost regarding 2007. For example: contributions to retirement plans can, in many cases, be made right up to the date the return is filed and still be taken as 2007 deductions. With an extended 2007 tax filing deadline, a self-employed individual could fund a retirement plan contribution up to October 15, 2008 and claim a 2007 tax deduction. This can produce significant savings and just may make retirement all that much sweeter.

As for 2008 tax-minimization strategies, the starting point, says Peter Michaelson, an Eisner partner, is a close review of W-2 forms, withholding, and tax payments. The goal: cutting to the legal minimum how much money the IRS and local tax agencies get upfront. “It does no good to prepay 2008 state and local income taxes if you are subject to 2008 AMT,” says Speiss. Beyond that, Eisner experts tick off areas that are winning savings for their clients:

• Lessening AMT pains. The salt in the wound of those subject to paying the federal Alternative Minimum Tax is that payments for state and local taxes are not deductible for them and that is why Speiss urges those clients to defer state and local tax payments as long as possible, preferably into the next tax year (when, maybe, the taxpayer may not be subject to AMT).
• Use LLCs to buy investment real estate. “This has become significant,” says Speiss. Foreign buyers of real estate using LLCs can attain significant tax and non-tax benefits, as can U.S. citizens, including estate and gift tax savings. Benefits are that some estate taxes may be avoided and, of course, this also affords some asset protection against lawsuits (a slip and fall in the lobby, for instance). “We typically advise clients never to hold real estate outright,” says Speiss.
• Give appreciated stock to charities. This strategy delivers sweet tax benefits to the donor and financial benefits to the recipient and it works like this: Say you bought stock in XYZ (a public company) at $70 but today those shares are each worth $150. Give those shares to a charity and it gets the full $150 and you get the full $150 deduction and, along the way, you did not pay taxes on the capital gain. “Clients will do that any day of the week, rather than write a check for $150,” says Michaelson.
• Don’t push the limits. New IRS rules may impose a penalty on taxpayers who file returns with a reasonable basis for treating certain items but who do not disclose the item’s tax treatment in the return. If the tax return item position has substantial authority, disclosure may not be required. A 20% penalty could be assessed against the taxpayer where these standards and disclosures are not complied with. Tax return preparers could also be penalized. The upshot: make sure you understand all positions taken on your tax returns and comply with disclosure rules.

Getting the message that smart tax strategies are getting ever more complicated? Taxes are no longer “do it yourself ”, certainly not for high earners. “You want at the very least to schedule an annual consultation with a tax expert,” says Loiacono. Would you do your own root canals? Enough said. Get professional tax consultation and watch the savings multiply.

Look for Part II of Eisner tax strategy in the March 31st issue of Crain’s.

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